How is an NCD different from a company FD?

Shriram Transport Finance is coming out with an NCD issue next week, which is the latest in the series of the many NCD issues it has launched till date. Now, the same company – Shriram Transport Finance Company Ltd also offers public fixed deposits for subscription with interest rates similar to those of the NCDs. This post is in response to a query by one of my clients who already has invested in the company’s FDs and wanted to know the basic difference between an NCD and an FD.

Safety – A Non Convertible Debenture or an NCD is fully secured- it is backed by a charge on the company’s fixed assets. This means that in case of default or the company being unable to repay the clients, the latter can liquidate/sell off the mortgaged fixed assets to recover their dues. Company FDs are unsecured, hence more risky.

Subscription – One can invest in NCDs directly through the issuer only during an ongoing issue, else they have to buy it from the secondary market later, provided there is a matching seller. Company FDs are open for subscription always.

Liquidity – An FD matures after a specified period, but it can be prematurely closed by the depositor by incurring a penal charge, which results in a reduced rate of interest earned on that FD. An NCD also matures on a specified date, but since it is listed on the stock exchange, it can be sold/ traded on the exchange.

Tax impact – The interest earned on the FD attracts a TDS, and is clubbed with your income and taxed at your income tax slab. The interest earned on an NCD is also taxed similarly. However, it does not attract any TDS and in some cases, when sold before maturity for a profit, could also incur capital gains tax.

While NCDs and FDs do differ on the above mentioned basic parameters, more important than deciding which among these is a more suitable investment option, is to do a thorough check on the company’s financials, its past repayment record, ratings accorded by rating agencies etc.